An expanding international business sector has fuelled the booming Bermuda economy, but growth is likely to slow down this year as global economic factors impact on the Island, Finance Minister Paula Cox said yesterday.

In her summary of the economic situation in the Budget speech, Ms Cox added that employment levels appeared to have peaked, with the financial services sector creating more jobs, while the number of posts declined in the construction and retail sectors.

And, although figures for the last quarter of 2007 have not yet been finalised, Ms Cox expects Bermuda to have a balance of payments surplus of more than $1 billion for last year. The surplus represents the difference between the amount of foreign currency taken in and the amount of domestic currency paid out — effectively Bermuda's current account balance with the rest of the world.

Ms Cox attributed last year's rise in the inflation rate to 3.8 percent, from 3.1 percent in 2006, to rising oil prices and the fall in value of the US dollar. She added that external factors would also reduce the Island's economic growth rate this year.

"The global economic outlook for 2008 has been clouded by the continuing fallout from the sub-prime lending crisis," Ms Cox added. "There is continued turbulence in capital markets. As a result, the G-7 outlook now is more uncertain than it was before the release of third-quarter GDP data for many countries in the group.

"In the case of the United States, the outlook for the national economy is pessimistic as there is a convergence of views that the US economy is likely to experience a recession in 2008. While opinions and expectations vary widely, a large majority of respected forecasters now expect at least two quarters of declining real GDP. If so, real GDP growth in the US in 2008 may be roughly flat or up by 0.5 per cent. This outcome would be in contrast to an estimated 2.2 per cent in 2007 and 2.9 per cent in 2006.

"In the United Kingdom, Canada, Japan, Italy and Germany the growth rates for 2008 are projected in the range of 1.3 per cent to 2.2 per cent. In Bermuda's case, the outlook for 2008 is cautiously optimistic. Given the prevailing uncertainty in the global outlook, the Ministry of Finance anticipates that Bermuda's GDP growth in 2008 will likely settle in the range of 2.5 per cent to 3.0 per cent."

The sub-prime crisis, sparked by a wave of mortgage delinquencies across the US, has caused around $146 billion of write-downs of mortgage-linked assets by major banks so far and its ripple effect has caused a slump on world markets in recent months.

Ben Bernanke, chairman of the US Federal Reserve, America's central bank, painted a bleak picture of the prospects for the US economy in comments made on Thursday.

He forecast a further drop in home building and related activities, and said a softer jobs market, higher energy prices and falling home values could be expected to weigh on consumer spending in the near term. Tighter credit is also likely to continue to hold growth back, he said. The vast majority of Bermuda's imports come from the US, as do most of the Island's visitors.

Perhaps mindful of the difficulties caused by mortgage defaults overseas, and the ever-rising sums loaned to the Island's public by Bermudian banks, Ms Cox suggested that people should save more.

In tune with its economic empowerment theme, she said Government would focus on "helping people to become adept and comfortable with their own financial management".

She added: "Specifically, Government intends to encourage and to promote the importance of personal savings. An understanding of the value of savings promotes a greater sense of confidence and independence that you can run your own affairs."

Ms Cox said Bermuda's economy had enjoyed its strongest growth in a decade in 2006.

"The most recent official data on Gross Domestic Product (GDP) confirmed that 2006 was an exceptionally good year," Ms Cox said in the House of Assembly.

"Bermuda's economy expanded by 5.4 percent in 2006, and recorded its strongest performance in 10 years. Economic indicators such as employment levels, visitor arrivals, visitor spending, international company growth and a balance of payments surplus position suggest that 2007 was another year of strong growth."

On the employment front, Ms Cox said preliminary results from the Annual Employment Survey pointed to "a possible peak in employment levels" in 2007.

"The year-over-year increase was less than one half of one per cent in 2007 following an increase of 1.9 per cent in 2006. The total number of jobs was recorded at 39,832 in 2007," Ms Cox said.

Financial services continued to be the leading contributor to growth. "This was especially true of international business," Ms Cox said. "This sector expanded by four percent while generating an additional 198 jobs.

The real estate sector rebounded from the decline in jobs in 2006. It posted the second largest increase in the number of jobs in 2007. An additional 96 jobs boosted that sector's output in 2007."

There were around 4,050 jobs in the little-changed public sector, while employment fell in construction, retail, transport, communications and manufacturing last year.

The estimated balance of payments surplus would show a rise from 2006 of between five and six percent, Ms Cox said.

"The good performance in the external sector again was fuelled by the sustained growth of the international business sector," the Minister added. "The Bermuda market continued to attract new capital.

"Consequently, it was positioned sufficiently well to withstand the adverse impact of write-downs associated with the sub-prime lending crisis.

"The improved results in Bermuda's hospitality sector in 2007 also contributed to the increase in net foreign exchange earnings on Bermuda's account with the rest of the world. Tourist arrivals grew by about four percent in 2007 giving rise to an increase in visitor spending on the Island.

"Based on the indicators of performance for 2007 summarised above, the Ministry of Finance has raised its estimate of inflation-adjusted GDP growth in 2007 to the range of 3.5 to 3.75 percent."